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Donate a car -- the right way

December is decision time. Donations must be made by Dec. 31 for you to make use of any tax benefit next April. A little planning will not only mean a greater tax deduction but a better chance your old car will be put to good use. It also means you have the time to properly sever your car insurance and registration.

Select an approved charity -- an IRS-recognized 501(c)(3). Consult IRS Publication 4303, "A Donor's Guide to Vehicle Donations," as well as its charitable organizations page, which offers a way to search for tax-exempt organizations.

Contact the charity. Ask if the charity will resell the car for cash, offer it to a needy family or keep the vehicle for the organization’s daily use.

A vehicle that is resold for cash (that is, most of them) is deductible only on the sale price of the car, rather than its fair market value. If the charity gets only $800 for your $2,500 Ford, you can deduct only the $800. But if the charity uses your car in its daily operations, for things such as deliveries, you can deduct the full fair market value. Some charities offer vehicles at a discount to families who are rebuilding their finances; in those cases, the deduction can be taken at the higher amount.

Get a receipt from the charity. The charity is required to send a notice of sale within 30 days advising you of the car's sales price.

“The state may see in its records that you have a car still registered that is without insurance and penalize you for that,” she says. “And if the vehicle is in a crash or impounded, as legal owner you are going to be looked at.”

Your state department of motor vehicles typically will offer a Notice of Transfer of Title and release of liability that you can file once you have signed the car over. That tells the DMV you have sold a vehicle, and you should be able to cancel your insurance after the sale report is done.

Don’t just let the policy lapse; if you don’t renew it or pay the bill, the policy will be canceled for nonpayment. That can have a major impact on your future car insurance rates.

Your name doesn’t come off the legal title until the new owner registers the car, Gusner warns. “It’s a good idea to follow up at the DMV later on. You may not be legally liable anymore, but you don’t want to have to go to court to prove it.”